Nonqualified plans can be a win-win for your company and employees
A nonqualified deferred compensation (NQDC) plan can be a valuable tool to attract, retain and reward top talent because of the many unique benefits it can offer to participants. An NQDC plan can provide key employees, particularly highly compensated executives, flexibility to save for both short- and long-term goals while managing tax considerations.
What makes NQDC plans attractive to employees?
When used as part of an integrated compensation and benefits package—including 401(k) and defined benefit plans, company stock awards and health benefits—NQDC plans can help employees:
Manage their tax liability. NQDC plans allow for salaries, bonuses and other kinds of compensation—and the taxes owed on them—to be delayed until a later date, typically after an employee retires. This can help reduce the current tax obligation of highly compensated employees.
Close the retirement savings gap. Annual contribution limits on 401(k)s and other qualified plans mean that employees earning higher compensation can not contribute enough in those accounts to reach the generally recommended 80%-90% income replacement level for retirement. Since NQDC plans are not subject to ERISA requirements, there is no cap on contribution amounts; therefore, deferred compensation can create additional savings for retirement.
Save for financial goals other than retirement. NQDC plans may allow for “in-service” distributions to help employees meet other financial goals or obligations, such as a child’s college tuition or buying a new home.
How do employers benefit?
Many employers looking to recruit top talent incorporate deferred compensation plans into their benefits packages to make them more attractive and competitive in a tight labor market. Companies also use deferred compensation as an incentive to keep key managers engaged. For example, employers can make a deferred compensation contribution as part of a signing bonus for new key managers but require them to stay with the company for five years before vesting.
Because NQDC plans, unlike qualified retirement plans, are not subject to most ERISA requirements, employers have considerable leeway to decide the best approach for their unique needs. For example, employers can decide:
- Which select management groups or highly compensated employees are allowed to participate.
- What types of compensation participants can defer, including salary, bonuses, commissions and restricted stock units.
- When and how participants can take distributions, whether upon retirement or while still employed, or whether as a lump sum or in installments.
Implementing an appropriate NQDC plan design for your business requires upfront analysis of how it will fit with your company’s overall compensation and benefits strategy. Likewise, participants must think carefully about deferral elections and distributions based on their full financial picture and future goals. Working with an experienced benefits provider can help you develop a strategy that can help support your goals—and help employees work toward theirs. Talk with your Bank of America representative about how an NQDC plan can help support your business objectives.